2014 Economic Commentaries

To deal with the high level of unemployment during the Great Recession, lawmakers extended the availability of unemployment benefits—all the way to 99 weeks in the states where unemployment was highest. A recent study has found that the extensions served to increase unemployment significantly by putting upward pressure on wages, leading to less jobs creation by firms. We replicate the methodology of this study with an updated and longer sample and find a much smaller impact. We estimate that the impact of extending benefits on unemployment through wages and job creation can, at its highest, account for only one-fourth of the increase in the unemployment rate; an impact that is much lower than other estimates in the literature. Read More

Banks have been steadily increasing their exposure to interest rate risk since the end of the financial crisis, though large and small banks are doing so in different ways. This Commentary examines the maturity structure of assets and liabilities to identify the underlying factors responsible for the rise in interest rate risk and the differences between large and small banks. Read More

Estimates of labor market slack can diverge a great deal depending on how slack is defined. We calculate slack using five different concepts that all focus on a single labor market indicator, the unemployment rate. We show that the estimates all provide useful—but different—information. We argue that choosing the best measure of slack depends on the question being asked. If the question is, "Has the unemployment rate reached its new longer-run normal level?" then our answer is, "Almost." But significant uncertainty surrounds the estimates; and others may wish to consider additional labor market indicators. Read More

A number of studies have explored the relationship between public housing policy, poverty, and crime. This Commentary discusses the results of a recent study, which investigated the effects of closing large public housing developments on crime. To see if the demolitions—and the associated deconcentration of poverty—reduced crime or merely displaced it, researchers examined the case of Chicago. They found that closing large public housing developments and dispersing former residents throughout a wider portion of the city was associated with net reductions in violent crime, at the city level. Read More

This Commentary investigates whether there has been a growing divergence in the consumption of luxury and necessity goods across income classes. The analysis shows that while necessities represent a majority of the consumption basket for lower and middle income quintiles, their consumption of necessities in inflation-adjusted dollars has been declining in the face of higher prices of such goods and stagnant income growth. Higher income quintiles have seen increases in their consumption of luxuries, simultaneous with a decline in their consumption of necessities. Read More

Recent research has shown that geographic areas that experienced greater household deleveraging during the recession also experienced relatively severe economic contractions and slower recoveries. This analysis explores geographic variations in household debt over the past recession and recovery. It finds that regions that had very high household leverage at the start of the recession have shifted back toward national norms, while the variation of leverage within metro areas has maintained steady relationships with neighborhood characteristics such as location, demographics, and the age of the housing stock. Read More

Some inflation-forecasting models based on the Phillips curve suggest that there should have been more disinflation since the Great Recession than has shown up in core PCE or core CPI data. One way researchers have found to make the disinflation disappear is to remove the long-term unemployed from the overall unemployment measure that is typically used in the models. This analysis shows that the disinflation arises in such models because of the way they account for the long-term trend in inflation. Under a different measurement of trend inflation, which historical forecast accuracy suggests should be preferable, the recent path of inflation can be reasonably well explained by an inflation-forecasting model that incorporates the overall unemployment rate. Read More

As markets and business patterns change, new business establishments are created to serve them. Those new establishments can be provided by entrepreneurs creating new firms or by the owners of existing businesses opening new locations. We show that over the past three decades, new establishments have increasingly been provided by existing businesses opening new locations. Those new locations have created jobs at a higher rate than brand-new firms, which helps to boost job creation. Looking at both forms of new establishments shows that job creation is down following the recession, but new locations were growing entering the recession and should be a critical component of job creation as the economy continues to recover. Read More

We take a closer look at the connections between wages, prices, and economic activity. We find that causal relationships between wages and prices are difficult to identify, and the ability of wages to help predict future inflation is limited. Wages appear to be useful in assessing the current state of labor markets, but they are not necessarily sufficient for thinking about where the economy and inflation are going. Read More

The Treasury Department's CDFI Fund awards grants to community development financial institutions (CDFIs) that operate in low-income areas. Awards are intended to strengthen the institutions and increase the amount they lend to borrowers in those areas. This analysis of propriety data from the US Treasury shows that when CDFIs receive grant money, they put it to use as additional loans in impoverished and economically weak areas. Read More

Average interest rate risk in the banking system has been increasing since the end of the financial crisis and is almost back to its pre-recession level. But the increase has not occurred uniformly at large and small banks. At big banks, risk, while increasing, hasn't yet reached its pre-recession high. It's in small banks where we see a steep rise in interest rate risk. The big banks' exposure is being driven mainly by their liabilities. At small banks, it is coming from both their assets and liabilities. Read More

Credit default swaps, a useful but complex financial innovation of the 1990s, were traded over the counter before the financial crisis. Because of this infrastructure, a very opaque market emerged, and from it, the severe risk imbalances that helped fuel the crisis. Reforms are now being worked out and put in place which will move the majority of credit default swaps transactions to more transparent exchanges. Market participants will be able to see pre-trade and post-trade pricing, and regulators will have access to information that will allow them to monitor risk concentrations as they develop and take actions before they become of systemic concern. Read More

Using a statistical model, we find that three factors explain most of the decline in residential investment at the end of 2013 and the beginning of 2014: the increase in mortgage rates since early 2013, the unusually cold winter, and a modest tightening of lending standards in the residential mortgage market. Future prospects for residential investment depend heavily on mortgage rates. A return to normal weather and easing lending standards would boost activity, but even moderate increases in mortgage rates through the end of next year could restrain residential investment going forward. Read More

Public debate about the effects of government spending heated up after record-large stimulus packages were enacted to address the fallout of the financial crisis. Almost as noticeable as the discord was the absence of consensus among prominent economists on the issue. While it seems a simple problem to estimate the effect of government spending on output—the size of the government multiplier—it is anything but. Read More

A Taylor rule captures the historical behavior of the federal funds rate better when it also includes a partial-adjustment factor. Typically, the type of partial adjustment added is consistent with the FOMC avoiding large jumps in the level of the funds rate. We add another type of partial adjustment—consistent with the FOMC avoiding changes in the pace of change and improve the rule's historical fit. Read More

The Federal Reserve System is a model of an independent central bank, with the authority to resist political pressure and act in the long-term best economic interest of the country. But this has not always been the case. In the past—and not too distant past at that—US monetary policy has frequently yielded to other governmental requirements. Even for the modern Federal Reserve, independence is a nuanced, mutable and, ultimately, fragile concept, but one that is essential to maintain. Read More

Why has average income grown in some poor neighborhoods over the past 30 years and not in others? We explore that question and find that low-income neighborhoods that experienced large improvements in income over the past three decades tended to be located in large, densely populated metro areas that grew in income and population. Residential sorting—changes in population and demographics within neighborhoods—could help to explain this relationship. Read More

The earliest available source of metro-area employment numbers is the initial estimates of State and Metro-Area Employment, Hours, and Earnings (SAE) from the Current Employment Statistics program, but these figures are subject to large revisions. We show how large those revisions are for six metro areas and the four states in the Fourth Federal Reserve District. We also compare the precision of the initial estimates to the Quarterly Census of Employment and Wages (QCEW), which is less timely but more accurate. Our analysis confirms that the best approach for those wanting accurate metro-area employment figures is to use the final, benchmarked SAE or the QCEW. Read More

Investment in structures is still 29 percent below its pre-recession peak. Using a new indicator of the level of structures that would be warranted by economic conditions, we find evidence that the level of investment was too high in the first half of the 2000s. This overinvestment created an overhang of structures which has held down the growth of investment in structures during the recovery. Read More

All the signs in the housing market seem to be pointing the right way, except the amount of time loans are spending in the foreclosure process. Foreclosure fast-tracks for vacant homes in foreclosure may help reverse that trend. Read More

A standard Taylor rule, which expresses the federal funds rate as a function of inflation, the unemployment gap, and the past federal funds rate, tracks the federal funds rate well over time. We improve the fit by adding employment growth. Then we evaluate the effectiveness of that rule in a new way—by how accurately it predicts whether the FOMC moves the fed funds rate at its next meeting. It does pretty well, predicting nearly 70 percent of the time correctly. Read More

Some analysts pay particular attention to oil prices, thinking they might give an advance signal of changes in inflation. However, using a variety of statistical tests, we find that adding oil prices does little to improve forecasts of CPI inflation. Our results suggest that higher oil prices today do not necessarily signal higher CPI inflation next year, although they do help to explain short-term movements in the CPI. Read More